Insurers gain as tax cut boosts earnings outlook

PUBLISHED : Friday, 25 April, 2008, 12:00am
UPDATED : Friday, 25 April, 2008, 12:00am


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Shares of mainland insurers rose for the third consecutive day yesterday on hopes that Beijing's decision to cut the stamp duty on trading will help reclaim some of their investment losses caused by the recent weakness in the A-share market.

China Life Insurance and Ping An Insurance (Group), the country's two largest life insurers, soared the 10 per cent daily limit in the morning trading session in Shanghai. China Life ended at 32.87 yuan while Ping An closed at 66.78 yuan.

The broad rally in Shanghai lifted their counterparts in Hong Kong. China Life's H shares rose 7.99 per cent to HK$33.80. Ping An gained 10.45 per cent to HK$72.95 and PICC Property and Casualty, the country's largest non-life insurer, closed 11.86 per cent higher at HK$8.11.

The three insurance stocks have declined between 35 per cent and 52.52 per cent from their peaks in October. In the past two years, the stocks were used as a proxy to the A-share market due to their sensitivity to the equities market.

Analysts said mainland insurers, which have invested heavily in the A-share market, should be the main beneficiaries of yesterday's rally.

'A-share insurers and brokerage firms could experience temporary momentum if the market rallies as they tend to be highly levered to the performance and trading turnover of the A-share market,' Goldman Sachs said in a research report yesterday.

Equity investments made up about 23 per cent of China Life's portfolio last year, compared with 24.7 per cent for Ping An and 20.8 per cent for PICC. The majority of stocks are purchased in the A-share market.

The stellar run in the mainland markets last year helped Chinese insurers post handsome profits.

Total investment income for China Life and Ping An soared 135.5 per cent and 68 per cent last year, respectively, when the A-share market nearly doubled.

Investment income has accounted for about 40.89 per cent of total revenue for China Life compared with 37.76 per cent for Ping An.

This year analysts have taken a bearish view of the insurance sector given the slowdown in core earnings and continued weakness in the mainland markets.

'The A-share market consensus earnings growth forecast of 34 per cent in 2008 leaves ample room to disappoint investors,' said Jerry Lou, a China Strategist at Morgan Stanley. 'Given earnings deceleration, we do not think such a rally can last.'

The Shanghai Composite Index lost 34 per cent in the first quarter and is down 28 per cent this year as the global downturn and fears that state-owned non-tradable shares will flood the market dent confidence.

PICC said it trimmed its stock holdings from 21 per cent to 12 per cent in the first quarter. Ping An and China Life have also noted they would reduce their exposure to stocks this year when corporate earnings are expected to fall.

JP Morgan estimated that for every 10 per cent drop in the A-share market, earnings would be cut by 5.3 per cent for China Life, 7.9 per cent for Ping An and 7.8 per cent for PICC.